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In America's Image

You wouldn't think of it as a bastion of economic liberalism. But in the last few years, Syria, Washington's archnemesis and the final, symbolic frontier of Baath Party socialism, has swung open its once shuttered economy with a neoliberal flourish. Where once there were only risk-averse, state-run banks, private lenders are now doing a brisk trade. New investment laws are stimulating foreign direct investment and a simplified tax code is boosting state revenues. Interest rates are low, and a stock market is slated to open in August. The result: 5.6 percent GDP growth this year, up from 5.1 percent in 2006. "For the first time in decades, the Syrian economy is open," says Jihad Yazigi, editor of the economic bulletin the Syria Report.

Damascus may have strained ties with Washington, but it has no qualms with the Washington consensus—the formerly fashionable free-market formula for developing-country growth celebrated during the Clinton era. The consensus, which basically touts free trade, low taxes and privatization as the way to economic success, has fallen on hard times recently—not only have Russia, Latin America and Southeast Asia turned away from it, but even the United States is upping public spending and eschewing free trade as a protectionist mentality takes hold globally.

Yet, oddly, the brand of economic neoliberalism that once defined the consensus has found a home in the Middle East. Syria's success echoes similar makeovers from Morocco, which is trying to diversify away from its large agricultural sector, to Iran, which is engaged in a low-key, but broad, privatization drive.

It is the region's latest big idea; during the cold war, it embraced the kind of populist socialism now in vogue among such developing nations as Venezuela, Russia and Thailand and got nothing but economic stagnation and massive deficits in return. Now, a younger generation of Western-educated leaders are betting on their own interpretation of the Washington consensus to turn the economic tide.

That's good news for consensus supporters like the World Bank and, in particular, the IMF, which is struggling to find new lending opportunities now that so many of its clients have paid off their emergency borrowings. While the fund isn't preparing any loans in the Middle East and has no permanent office there, it is circulating advisory teams throughout the region with growing regularity. Meanwhile, Joseph Saba, the World Bank's director of Middle East and North African affairs, has found his dance card suddenly full. "The number of senior officials who are keen to modernize and reform the economy is growing," he says. "They are seeking the best international advice they can get, including from the World Bank, and then applying it to the Syrian situation."

Consider the Arab world's two most powerful economies, Egypt and Saudi Arabia, both of which averaged 5.5 percent growth over the last three years. In Cairo, the government has floated the Egyptian pound, liberalized the tax code and reduced customs tariffs. Foreign direct investment is expected to reach $7.8 billion this year, up from $5.4 billion just two years ago, owing to relaxed investment laws. Companies nationalized under socialist strongman Gamal Abdel Nasser are being restructured for divestment. Saudi Arabia, meanwhile, has invested some of its petroleum profits to reduce its domestic debt to 28 percent of GDP, down from its peak of 120 percent. A mortgage law is currently working its way through the legislature, and last October the central bank granted the kingdom's first licenses for private insurance companies. Last year, the country ranked 38th on the World Bank's list of 175 best countries for business, up from 67th just two years ago.

So what drove these countries—until only a few years ago, backwaters of the global economy—to adopt the agenda the rest of the world now rejects? Perilous demographics. The number of adults entering the work force in most Arab countries is growing at 3 to 4 percent a year, well above the global average. Arab governments realized they could never find enough jobs for such a young work force without opening their economies to foreign investment and modern banking practices.

The region's fraternity of new leaders is also far more accommodating of change than its predecessors. Saudi King Abdullah, who assumed the throne in 2005, has surrounded himself with U.S. -trained reformers. In Egypt, the economics ministries are headed by young, Western-trained officials who are said to have the backing of Gamal Mubarak, the son and likely heir apparent of President Hosni Mubarak and a former executive at the Bank of America. In Syria, a similar coterie of reform-minded technocrats work with the blessing of the country's 43-year-old president, Bashar al-Assad.

The next step for these new leaders will be to take on the third rail of Arab economics—the subsidies on staple goods and services like cooking oil and transportation that can account for up to a third of public spending. Cairo and Damascus have already begun to phase out some price supports, albeit gradually. The challenge is to maintain support of the Arab street. "These reforms are not popular," says Samir Siefan, a managing partner at Damascus-based consulting firm BDO. "If people were allowed to protest, they would." Still, success in even one country could have a viral effect across North Africa and the Middle East. That would be a reform effort worthy of its own appellation. Call it the Arab consensus.